If you run your own limited company, one of the most important financial decisions you make each year is how to pay yourself. The split between salary and dividends directly affects how much tax you and your company pay in total. Get it right, and you could save thousands. Get it wrong, and you are handing money to HMRC unnecessarily.
The Basic Principle
Salary is a deductible expense for your company, which reduces its corporation tax bill. However, salary attracts both income tax and National Insurance — from both you (the employee) and your company (the employer). Dividends, on the other hand, are paid from post-tax profits. They do not attract National Insurance at all, and the dividend tax rates are lower than income tax rates.
For 2025/26, the key numbers are:
- Personal allowance: £12,570
- NI primary threshold: £12,570
- Employer NI: 15% above £5,000
- Dividend allowance: £500
- Dividend basic rate: 8.75%
The Optimal Strategy for Most Directors
For a sole director with no other income, the most tax-efficient approach is typically to pay a salary equal to the NI primary threshold of £12,570 and take the rest as dividends. At this salary level, you pay no income tax (covered by the personal allowance) and no employee NI (below the primary threshold). Your company pays employer NI of approximately £1,136 on the salary above the £5,000 secondary threshold, but this is deductible against corporation tax.
The dividends you receive are then taxed at the lower dividend rates. The first £500 is tax-free (the dividend allowance), and the remainder is taxed at 8.75% if your total income stays within the basic rate band, or 33.75% if it exceeds £50,270.
When It Gets More Complicated
This simple model works well for many directors, but several factors can change the calculation. If you have other income from employment, rental properties, or investments, that income uses up your personal allowance and basic rate band first, pushing your dividends into higher tax brackets.
If your company has multiple shareholders, such as a spouse, it may be more efficient to distribute dividends between you to make use of both personal allowances and basic rate bands. However, the dividends must reflect genuine shareholding — HMRC will challenge arrangements that exist purely for tax avoidance.
The Dividend Tax Rise in 2026
From April 2026, dividend tax rates are increasing by 2 percentage points. The basic rate will rise from 8.75% to 10.75%, and the higher rate from 33.75% to 35.75%. This makes the salary-dividend calculation even more important, as the gap between dividend tax and income tax narrows.
Use our dividend vs salary calculator to model your specific situation and find the optimal split for 2025/26.
M. Samiuddin QUADRI is a chartered certified accountant at Gladstone & Co. Accountants, advising owner-managed businesses on tax-efficient remuneration strategies.